The pursuit of higher education is an investment that is often accompanied with considerable cost. The American Opportunity Credit and the Lifetime Learning Credit are available to benefit eligible taxpayers.
American Opportunity Credit
The American Opportunity Tax Credit (AOTC) is a federal tax credit for qualified education expenses paid for the first four years of higher education. The AOTC for each eligible student is the sum of 100 percent of the first $2,000 of qualified education expenses paid and 25 percent of the next $2,000 of qualified education expenses paid. The maximum credit is $2,500 per eligible student. The American Opportunity Tax Credit is applied against federal tax, and 40 percent of the total credit is refundable. In other words, if a taxpayer is eligible to claim the full $2,500 credit and has federal tax before credits of $1,500, the total tax is $0 ($1,500 Tax – $1,500 nonrefundable AOTC) and 40 percent of the total credit ($2,500 x 40% = $1,000) is refundable. The total claimed credit on the tax return would be $2,500 ($1,500 nonrefundable portion and $1,000 refundable portion).
Lifetime Learning Credit
The lifetime learning credit (LLC) is a nonrefundable federal tax credit available to eligible students that paid qualified tuition and fees required for enrollment.
The credit is equal to 20% of the first $10,000 of qualified education expenses paid for an eligible student, with a maximum credit of $2,000 per tax return. The LLC is nonrefundable, meaning the credit can only offset federal tax.
Who Can Claim the American Opportunity Credit and Lifetime Learning Credit?
Taxpayers may claim the American Opportunity Credit or the Lifetime Learning Credit if qualified higher education expenses were paid for an eligible student (themselves, a spouse, or any dependents) in the tax year to a qualified educational institution. In order to claim AOTC or LLC, the following requirements must be met:
- The student received Form 1098-T from a qualified educational institution.
- The taxpayer, spouse or dependent was not a dependent on someone else’s tax return.
- Filing status was not married filing separately.
For AOTC, student eligibility for the credit must meet the following requirements:
- At of the beginning of the tax year, the student had not completed their first four years of postsecondary education.
- The AOTC (or former HOPE credit) had not been claimed for any four tax years prior to the current tax year.
- For at least one academic period beginning in the tax year, the student both:
- Was enrolled in a program that leads to a degree, certificate, or other recognized educational credential, and
- Enrolled at least half time for at least one academic period.
- As of the end of the tax year, the student had not been convicted of a federal or state felony for the possession or distribution of a controlled substance.
For LLC, student eligibility for the credit must meet the following requirements:
- Enrolled or taking courses at an eligible educational institution.
- Enrolled in course(s) to pursue a degree or other credential or obtain or improve job skills.
- Enrolled for at least one academic period beginning in the tax year.
Taxpayers may elect to take either the American opportunity credit or the lifetime learning credit for an eligible student in a given tax year, but not both. However, taxpayers may claim the AOTC for one eligible student and the LLC for another eligible student on the same tax return.
The AOTC and LLC are subject to income limitations. Currently (per 2023 Form 8863 instructions), the full credit per qualifying student (for AOTC) and per return (for LLC) is available if a taxpayer’s modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less if married filing jointly). A partial credit is available for taxpayers whose MAGI is between $80,000 and $90,000 ($160,000 and $180,000 MFJ). No credit is available to taxpayers whose MAGI exceeded $90,000 ($180,000 MFJ).
Qualified Education Expenses
Qualified education expenses include tuition and related expenses required for enrollment or attendance at a credit-eligible educational institution. Related expenses include fees books, supplies, and equipment needed for a course of study (AOTC only). Student activity fees are qualified education expenses if the fee is required as a condition of enrollment or attendance. Insurance, medical expenses (including student health fees) and living expenses (room and board, transportation, and similar personal expenses) are not qualified. Expenses related to sports, games, hobbies, and noncredit courses are generally disqualified unless they are a required component of a degree program. For the Lifetime Learning Credit only, sports, games, hobbies, and noncredit courses expenses are qualified education expenses if the student acquires new job skills or improve existing job skills from the course.
Eligible expenses for AOTC and LLC are reported net of tax-free funds. Tax-free funds include nontaxable scholarships, grants (e.g., Pell), employer benefits, payments from qualified education accounts, and other assistance. Funds used for qualified education expenses include payments by cash, check, credit or debit card, or with loan proceeds. Qualified education expenses can be paid by the taxpayer, spouse, dependent, or third party. Expenses are included with the tax year they are paid.
If a student withdraws from class(es), the credit may still be claimed for any nonrefunded qualified education expenses paid, net of any amounts refunded.
AOTC and LLC Comparison
Summarized below are the differences between the American Opportunity Credit and the Lifetime Learning Credit.
For more information, please review IRS Publication 970, which is updated each tax year by the IRS. This article is intended to be an overview of the credits and does not cover the eligibility factors and the special circumstances in their entirety. This article is not intended as tax advice. Please contact the professionals at Gilliam Bell Moser with any questions.